The present invention relates to the field of accounting for financial instruments, such as mortgage backed securities, asset backed securities, and related systems and methods, in which securities are backed by loans which provides loan funds to borrowers, and the borrowers are obligated to repay the loan funds over time by way of a series of loan payments.
Multifamily housing is housing that is subdivided into a number of independent units occupied by people, herein referred to as residents. The number of units in a multifamily housing property can vary from a relatively small number of units, to a relatively large number of units, such as in an apartment building having hundreds of units.
Because of the amount of money involved in purchasing multifamily property, most potential purchasers do not purchase the multifamily housing property outright. Rather, lenders, such as banks, mortgage lenders, and so on, offer multifamily mortgage products to potential multifamily property purchasers. A multifamily mortgage product generally comprises a lender's obligation in which the lender (mortgagor) commits to provide loan funds sufficient to purchase the multifamily property and a borrower's obligation in which the borrower (purchaser, mortgagee) commits in exchange to repay the loan funds by way of a series of loan payments. If the borrower fails to repay the loan funds, the lender has a legal claim against the multifamily property which allows the lender to sell the property and use the proceeds to pay off the loan balance (foreclosure). The mortgage product therefore allows the borrower to purchase the multifamily property and pay for the multifamily property over time, while also ensuring that the lender is repaid. In the multi-family loan area, loans are generally much larger.
A multifamily loan holder or multifamily loan purchaser may create mortgage backed securities (MBS) as part of an MBS execution, or create other financial instruments or assets that are collaterallized by cash flows associated with the multifamily loans, including both loans that have been purchased by the purchaser and other loans that have not been purchased by the purchaser. For example, in the case of an MBS, the purchaser may acquire a pool of loans, securitize the pool of loans to create the MBS that is then sold to investors, and hold the pool of loans in trust for the benefit of the investors. The size of the pool of loans may be large or small and may depend in part on the amount of the underlying loan or loans. For example, for an MBS backed by a multifamily loan, the number of loans in the pool may be relatively small (often a single loan) because of the large loan amount of the multifamily loan.
Purchasers, guarantors, investors, and/or lenders associated with mortgage backed securities may be subject of accounting rules that address how their financial assets must be recorded in their financial statements. Financial Accounting Standards Board (FASB) Interpretation Number (FIN) 46 is an interpretation of accounting research bulletin No. 51, December 2003 regarding consolidation of variable interest entities that requires consolidation of securities that are not qualified special purpose entities and for which an entity bears the principal risk of loss, i.e., for which an entity is the primary beneficiary. Consolidation includes the process of recording the assets, liabilities, and equity of the entity on a primary beneficiary's financial statements.
FIN 46 requires that an entity make a determination whether the entity bears the principal risk of loss (i.e., whether the entity is the primary beneficiary). Based on historical data, 5% of these loans will fail, creating variability in the cash flow resulting from these loans. If a guarantor absorbs more that a predetermined amount of the total variability for a security, the security may be consolidated under FIN 46 on its balance sheet.
What is needed is a system and method to implement a quantitative method that properly allocates risk among parties that are beneficiaries to a multifamily MBS. What is further needed is such a system and method configure to identify both systemic and idiosyncratic risk in implementing the quantitative method. However, it should be understood that the techniques described and claimed herein may also be applied to meet other needs instead of or in addition to the above needs.